Marginal Lending from the European Central Bank … to the moon!
(And a big H/T to Lorcan Roche-Kelly at Corner Turned for the above chart)
Use of the ECB’s emergency overnight lending facility jumped to €15.8bn on Wednesday — the highest figure since June 2009 — when the thing was first started. It’s a pretty odd move given, as Money Supply notes, the facility incurs a penal rate.
What’s going on?
The dominant theory this Thursday is that some bank — some where in the eurozone — made some sort of mistake. Either that or there’s a bank in trouble.
We contacted Bank of America Merrill Lynch rate analysts Ralf Preusser and Max Leung to find out more. The good news is we should have some sort of indicator soon.
Here’s what they said:
Given that the collateral used to borrow from the marginal lending facility (at 1.75%) is also eligible for the [main refinancing operations] MRO (at 1%), there should be no reason for banks to borrow that much, especially with full allotment still in place for the MRO.
From what we know, there wasn’t much anomaly in the money market yesterday [Wednesday] and Eonia still fixed at 70bp, comfortably below 1%. We think that the jump in overnight borrowing could have been caused by a mistake in the MRO earlier this week - either a fat-finger mistake or that a bank simply forgot to borrow in the tender.
In the first case, it could have been that a bank wanted to borrow €17.5bn in the MRO, but entered €1.75bn instead, which would correspond to a shortage of €15.8bn and that’s the amount of borrowed from the marginal lending facility. The timing of this jump matches the settlement time of the MRO as well. This could also help explain why the MRO this week dropped by €20bn rather unexpectedly, with the market expecting the amount to be relatively stable.
If the above theory is correct, then we should see around €10-15bn again tonight and in the coming days, until the next MRO that will take place on 22 Feb (settling on 23 Feb).
Of course, it could also have been a one-day payment mismatch, in which case the facility should drop back to around zero tomorrow. But a payment mismatch of size €15.8bn seems like a rather big mistake to us.
Whoops!
As to which bank might’ve made a mistake — the situation’s been doubly confusing because of strange movements in Irish bank liabilities recently. Several lenders issued around €17.5bn of floating-rate notes between January 25-28, guaranteed by the government and thus eligible collateral for MROs (screencap via the NTMA):
Most of it was issued in time for an MRO that settled on February 2, maturing on February 9. In that case — we don’t think Irish lenders would likely be the culprit in more recent MROs, especially with FRN issuance slowing down lately and the original €17.5bn spread across institutions.
We can’t see any funny business in Greek or Portuguese banks either.
And it’s not as if banks from any of these three countries would forget what they need to borrow right now, is it?
By Tracy Alloway and Joseph Cotterill.